Business

Bitcoin's coming-out party

By Chris O'Brien Los Angeles Times

Posted:
05/17/2013 01:53:21 PM PDT

Not that long ago, the virtual currency Bitcoin was one of the Internet's great rebel causes, a digital form of money embraced by libertarians and anti-establishment types who saw it as a way to diminish the power of big governments and big corporations.

But Bitcoin's growing popularity and a recent surge in value has caught the eye of entrepreneurs and venture capitalists, including some who are convinced that Bitcoin could be the biggest thing on the Internet since, well, the Internet itself changed our lives two decades ago.

Now, Silicon Valley is performing its classic ritual to signify that a new technology, product or idea is ready to be taken seriously: It's holding a conference.

This weekend, about 1,000 representatives of the growing Bitcoin economy are gathering to discuss how far the currency has come, and what needs to happen next to fulfill what they see as its revolutionary promise. So far, Bitcoin has been used to buy games and virtual products from Internet merchants and in some instances, reportedly, to move money for illicit purposes. Online exchanges have also sprouted up to trade the currency.

"I think we're starting to see Bitcoin moving out of the shadows of the Internet into something that becomes more mainstream," said Jeremy Liew, a partner at Lightspeed Venture Partners. "We're starting to solve real problems for real people. And that's exciting."

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That sense of optimism should be on display at the event, which began Friday night at the San Jose (Calif.) Convention Center. Among the topics being covered are security, financial regulations, business development and new opportunities. The event is being hosted by the Bitcoin Foundation, a trade group formed in September to advocate for the budding currency and to create a forum for tackling emerging problems.

And it has a small dash of celebrity thanks to the presence of keynote speakers Cameron and Tyler Winklevoss, who have been buying bitcoins.

Although there have been Bitcoin gatherings in the past, many backers see this as the currency's coming-out party.

"I think you're going to see more entrepreneurs, (venture capital) investors and payments-industry execs walking the halls this year," said Alex Ferrara, a partner at Bessemer Venture Partners. "The conversation has shifted from whether or not it can succeed to questions of how big it can get and what can be done to promote the ecosystem and associated regulation."

To the uninitiated, Bitcoin can be a mind-boggling concept. In 2009, a programmer using the pseudonym Satoshi Nakamoto created the basic software for the Bitcoin currency. It was released as an open source, meaning anyone could add to it or alter it, and Nakamoto later walked away from the project, leaving others to develop it.

And develop it they did. The Bitcoin system includes a series of protocols that run across a wide number of servers around the world for regulating the creation and trading of bitcoins. People can get bitcoins either by buying them with traditional currency or by "mining" them. The mining process involves solving complex computing puzzles that reward a person with bitcoins.

Confused? Here's the bottom line for Bitcoin boosters: They like it because it's a currency that's decentralized, not controlled by any government or company.

It is also mostly, though not completely, anonymous. And because there's no bank or credit card company running the system, there are basically no transaction costs.

"And I do think the opportunities for Bitcoin feel like the Internet in 1995," Liew said. "It's still currently niche, but it has the opportunity to revolutionize the way we pay for everything."

To that end, entrepreneurs are starting companies that provide greater infrastructure for the trading, selling, storage and spending of bitcoins.

This month, Coinbase of San Francisco announced it had raised $5 million in venture capital, the largest such funding for a Bitcoin company to date. The company makes a digital wallet and a platform to allow merchants to accept bitcoins as payments.

Adam Draper, a venture capitalist who runs an accelerator for startups called Boost, recently announced he was seeking seven Bitcoin companies.

"Bitcoin is one of the most innovative things I've seen in the last five to 10 years," Draper said.

In addition, he's created the Boost Bitcoin Fund, which will give $50,000 to each company that graduates from the accelerators. Liew's Lightspeed firm has invested in the Boost fund, as well as making its own direct Bitcoin investments.

As excited as backers are, they also recognize that bitcoins still face enormous challenges before they can gain wider acceptance. Some Bitcoin exchanges have been hacked, and some Bitcoin companies have shut down without refunding money to users.

And more recently, governments have sent mixed signals on whether they are willing to embrace this type of currency, or whether they're considering a crackdown. This week the Homeland Security Department apparently shut down a U.S.-based unit of a Japanese Bitcoin trading platform.

"The very nature of Bitcoin itself invites government scrutiny," said Brian E. Klein, a partner at Baker Marquart LLP and a criminal defense attorney who was to appear on a Bitcoin regulation panel this weekend. "And anybody getting involved in a Bitcoin business needs to carefully consider all the regulatory issues."